HMO Mortgage

HMO Mortgages Explained

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ABC FinanceHMO Mortgages

Author: Lee Hemming CeMAP

20+ years experience in HMO Mortgages

An HMO mortgage is a type of specialist mortgage that is used to finance house in multiple occupations (HMOs). HMO mortgages work in a very similar way to buy to let mortgages, often being taken on an interest only basis on a fixed or variable interest rate.

Specialist HMO mortgages are offered by specialist HMO mortgage lenders and best offered by brokers who specialise in HMO mortgages. As you can see, HMO mortgages are a specialist subject!

In this guide, we break down the key points regarding HMO mortgages including what they cost, how much you can borrow and how to get an HMO mortgage.

HMO investment explained

What is an HMO?

HMO (House in Multiple Occupation), is a term used to describe a property rented out to at least three people who are not from one household but share communal areas, such as the bathroom and kitchen. When borrowing against an HMO, a specialist HMO mortgage is required.

The key term here is ‘household’. A single household is classed as a property used by couples who are married/living together, a single person, families or relatives. These do not fall under HMO landlord laws.

Another term often used to describe this type of property is a ‘house share’. This could be students renting one house or workers sharing a house.

Typical houses in multiple occupation (HMOs) include:

  • A property that has more than three tenants (with each on a separate contract)
  • Bedsits
  • Shared housing
  • Hostels
  • Privately run halls of residence
  • Employee housing

How do HMOs differ from traditional buy to let properties?

A buy-to-let or single let property is, for example, a house rented out to a single-family unit. An HMO property, however, is let to multiple (three or more) tenants, such as students. This will require a specialist HMO mortgage.

There are advantages and disadvantages to both HMOs and buy to let properties. A single buy-to-let is simpler to manage but if the tenant moves out, there could be a rental void, meaning you lose your entire rental income. As HMOs have multiple tenants, and the renal income from each tenant is separate, this rental income void is less likely.

How do HMO mortgages work?

HMO mortgages work by allowing you to take a mortgage deal against a property, which is then repaid through regular monthly payments. HMO mortgages are offered through specialist lenders and are usually taken on an interest only basis and may be subject to a minimum HMO property value, early repayment charges and other product arrangement fees.

Buy-to-let mortgages for HMO properties are simply referred to as HMO mortgages. A specialist HMO mortgage is used to purchase an HMO, with the property used as security for the debt. Affordability calculations on a specialist HMO mortgage are calculated based on your rental income.

HMOs should always be funded using HMO mortgages. Using a standard buy to let mortgage product may result in you breaking your mortgage conditions and could result in your lender requesting full repayment. If you’re unfamiliar with HMO lending, then consider working with a specialist HMO mortgage broker.

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Should I invest in an HMO?

The decision to invest in an HMO is an important one, especially buying your first HMO. This section covers some of the most important things that you should consider before taking out an HMO mortgage.

Are HMOs a good investment?

HMO landlords are attracted as they often offer greater rental yields and, in the right location, it can be easier to find tenants. Students, young professionals, companies and housing associations are all good examples of likely tenants. Tenants are attracted to HMO properties due to the low cost of living compared to letting a full property. They are popular in high-value rental income areas as the cost is shared by more paying residents.

Take the example of an HMO property used to provide housing temporary workers (e.g. contractors). Good rental income will likely be received and there will be a steady stream of tenants. Even better, the company may pay the rent regardless of whether they have put a worker in there or not. This saves you the hassle of having to find new tenants every time someone moves out.

As HMO mortgage rates are generally lower than the available yield from HMOs, they can be very profitable.

As the structure of the tenancies differs from that of a simple buy-to-let, HMO mortgages can be a little more complex to arrange. An experienced specialist mortgage broker can guide you through complex HMO mortgage criteria with ease.

Types of HMO mortgages

There are several different types of HMO mortgages. Below we break them down.

Fixed, variable and tracker rates

Like with residential and BTL mortgages, house in multiple occupation (HMO) finance products can also be offered on fixed, variable and tracker rates.

Fixed rate HMO mortgages are usually offered for periods of 2 to 15 years, with your monthly payments remaining the same during the fixed rate period.

Monthly payments on variable and tracker rate HMO mortgage products increase and decrease in line with interest rate changes each month. You can work out your likely monthly payments using our HMO mortgage calculator.

Interest only or capital repayment HMO mortgages

Most HMO mortgages tend to be interest only, meaning only the interest is paid each month and your full balance would remain outstanding at the end of the term.

As this is considered the ‘standard’ way to do things, you won’t usually pay higher HMO mortgage rates for interest only loans. In this regard, HMO mortgages are very similar to buy to let mortgages.

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How To Apply For A HMO Mortgage

Talk to a broker to find the best deal. They will present the options available to you.

Once you’ve chosen a product, the lender will assess your application and issue an agreement in principle.

You will complete the application form and send them any supporting information required for underwriting.

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Once the underwriting process is complete, you get your offer and the legal work can begin through solicitors.

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Your application is complete and your funds released. Any balance due to you is sent to your bank to be used as agreed.

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How much can I borrow?

How much you can borrow on an HMO mortgage is based on the loan to value (LTV), purchase price, rental income and in some cases, your personal income.

What is the maximum loan to value ratio (LTV) on an HMO mortgage?

The maximum loan to value (LTV) on an HMO mortgage is 80%.  As with most mortgages, the higher the LTV, the higher the interest rate. As such, lower loan to value HMO mortgages tend to come with the best HMO mortgage rates.

Some HMO mortgage lenders offering 80% insist on a low EPC rating whilst others may prefer an experienced HMO landlord. This is common practice amongst HMO mortgage and buy to let mortgage lenders, meaning your EPC rating could impact your finance costs.

If you’re looking for the best HMO mortgage rate it’s worth considering putting down a larger deposit to keep the LTV down. The lowest rates tend to be at LTV’s of between 50% and 65%.

How is affordability calculated on an HMO mortgage?

Affordability on an HMO mortgage is calculated based on the rental income of the security property.

Most specialist HMO mortgage lenders base the maximum loan size on rental coverage or a debt service coverage ratio, rather than personal earned income. This is usually between 125% and 140% of the rental income and will be based on either the pay rate or a stressed rate.

Pay rate means the HMO mortgage affordability will be based on the current interest rate whereas a stressed rate could be 2% over the pay rate, for example.

In most cases, as the rental income yield with HMO’s is strong, affordability is unlikely to be an issue even at higher LTVs. A good senior HMO mortgage broker will be able to make finding the right mortgage simple.

HMO mortgage rates & costs

The interest rates charged on HMO mortgage rates and costs are broken down below.

What HMO mortgage rates should I expect to pay?

HMO mortgage interest rates will be determined by a number of factors, namely applicant experience, loan amount, the borrowing entity and the HMO property itself.

In most cases, specialist HMO mortgage lenders prefer the applicant to have lettings experience, a first time landlord or a first time buyer could expect to pay a higher rate than an experienced HMO landlord.

Limited company house in multiple occupancy (HMO) mortgage applications may have an increased rate when compared to an application on a personal name.

Also, a larger HMO (five or more people) or non-standard property will attract higher interest than smaller HMOs and may require expert advice when it comes to HMO mortgages.

What fees will I pay on my HMO mortgage?

An important factor to consider is the fees involved in arranging HMO mortgages. You will likely find that the lower the rate, the higher the lender arrangement fee. In most cases, it works out pretty similar in cost over the fixed period.

Some specialist HMO mortgage lenders don’t charge arrangement fees whilst some may charge a flat fee of £995, or a percentage of the loan. Fees of 1% to 2.5% are common.

Other fees to consider are application fees, valuation fees, legal fees and HMO mortgage broker fees. Some lenders offer HMO mortgages with a free valuation and legal fees, and no upfront costs.

A good HMO mortgage broker will take all of this into account when recommending products. Most brokers do charge broker fees, although there is still a large saving to be made if the right product is offered. Most broker fees are only payable if the loan completes, you should always be wary when paying an HMO mortgage brokers fees upfront.

How to get an HMO mortgage

HMO mortgage lenders

With this type of property becoming more and more popular, the HMO mortgage market is growing to meet demand. Most lenders can be accessed directly or through a specialist HMO mortgage broker.

The HMO mortgage market can largely be broken down into 3 main types:

  • High street lenders/vanilla buy to let mortgage lenders: These HMO mortgage lenders will usually offer the best HMO mortgage rates but will have strict lender criteria. They will usually accept a maximum of 4 rooms with tight rules around the leases, actual rental income and the applicants’ experience. These lenders tend to be well known buy to let mortgage lenders.
  • Specialist HMO mortgage lenders: These will look at slightly more complex applications and larger HMO properties. Some niche lenders will have a specialist division, whilst being a largely vanilla buy to let lender. You may pay a slightly higher rate but will benefit from more flexible HMO mortgage criteria.
  • Commercial mortgage lenders: This type of HMO mortgage lender are ideal for those with complex HMOs, those lacking experience or those with quirks that won’t fit other lenders. You will pay a higher rate than with either of the above lenders but will benefit from the most flexible criteria.

The benefits of using a specialist HMO mortgage broker

Using a strong broker allows you to access all the best lenders through one source. An specialist HMO mortgage broker will get in touch to gather key information about what you’re looking to do, and about you as a borrower, before finding the best deals to suit your circumstances.

Don’t be concerned about being asked a lot of questions when applying for HMO mortgages. The more information available, the more they’re able to support your needs. This will help you get the best deal.

The only real disadvantage is that you may have to pay a fee for this service. You should ask the specialist mortgage adviser how much this fee is during the initial conversation.

Generally, we don’t charge broker fees for HMO mortgages above £150,000. However, for smaller mortgages, this will be considered on a case by case basis. We aren’t tied to any one lender and are totally unbiased. Our only interest is in securing the best deal for you.

HMO valuations & conversions

How will my HMO be valued?

The main two types of HMO (house in multiple occupation) valuation are as follows:

  • Bricks and Mortar Valuation: This is the standard method of valuation for most types of HMO property. This type of valuation is simply of the building only and assuming it is vacant.
  • Commercial Valuation or Investment Valuation: This is the value based on the overall investment or business rather than just the building itself.

Many people assume that when a property is converted, it instantly increases in value because of the rental yield. However, this isn’t strictly correct. For a standard residential house converted to an HMO, most specialist HMO mortgage lenders will base the LTV (Loan to Value) ratio on the bricks and mortar value.

Take, for example, a street full of four-bed terraced houses all valued at around £100,000. All of them are either owner-occupied or let to single-family units on ASTs (Assured Short-hold Tenancies). If one of those properties was converted to a four-bed HMO, at a cost of £10,000, it would be unlikely to now value up at £180,000 for mortgage purposes. Smaller HMO’s are treated much the same as a standard buy to let property.

To obtain an investment or yield-based valuation, in most cases, you need a minimum of 6 letting rooms in HMO properties.

Can I convert a property into an HMO?

This can be done, subject to planning permission. However, it’s worth bearing in mind that not all lenders will allow this.

We have access to house in multiple occupation (HMO) development finance products which are ideal for this scenario, regardless of the level of refurbishment involved. The interest rate will be higher whilst the refurbishment work is carried out, but a lower HMO mortgage interest rate will be available when the work is complete. This is often referred to as a bridge-to-let product.

In some cases, we can arrange a property refurbishment loan whilst having the long-term HMO mortgage pre-approved and ready to complete. In these circumstances, you can move to the cheaper long-term HMO lending as soon as the work is complete, by taking out a HMO remortgage.

What is Article 4 direction?

An Article 4 Direction is a restriction imposed by the local council to control the use of permitted development rights.

Before Article 4 came into effect, you could change the use of a property from C3 (family home) to C4 (HMO) without consent. Now, if the property is in an Article 4 area, you must apply for consent to change the use.

Is an HMO licence required?

Any property deemed a ‘Large HMO’ will need to have a valid HMO licence in place. According to the UK government website, an HMO is considered to be large if both of the following apply:

  • It is let to five or more separate tenants forming more than one household.
  • Tenants all share a bathroom, kitchen and toilet.

Different local councils may have different rules regarding issuing a HMO licence.

You must have a separate HMO licence for each ‘house share’ property you run. This usually lasts for five years and must be renewed before it runs out.

The lender may also want a copy of any HMO licences and any HMO lending will be dependent upon there being a satisfactory HMO licence. If you don’t have an HMO licence, they may look to either accept an undertaking from you to obtain one or, evidence that you have applied. HMO mortgages can only be offered for properties that have a current HMO licence.

Typically, this needs to be done within 28 days of the decision and there may be HMO licence fees to pay.

For specialist HMO mortgage advice about the funding HMOs enquire online now or call to speak to a specialist HMO mortgage adviser on 01922 620008.

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